Market Commentary 29th July 2024 – from Charlie Hancock

An initial reading for a UK Purchasing Managers’ Index (PMI) indicated that economic growth accelerated during July. Both the services and manufacturing sectors reported expansionary conditions during the month, with the reading for the manufacturing sector reaching a 2 year high. Firms reported an improvement in sentiment following the General Election.

The newly appointed chancellor, Rachel Reeves, stated that the government will publish the results from an audit into the UK’s public finances at the end of July. There was growing speculation last week that the chancellor was preparing to announce spending cuts.

Weak performance in French luxury goods companies weighed on the CAC 40 index last week. Moet Hennesy Louis Vuitton (LVMH) reported lower than expected revenues, with their share price declining by 2.5% across the week. Kering, the owner of Gucci, saw their share price fall by 9.79% after issuing a profit warning following a 19% decline in sales during the 2^nd quarter.

A composite PMI for the Eurozone indicated that growth stagnated during July. The manufacturing sector continued to see activity decline, whilst growth in the services sector slowed. The downturn in manufacturing was particularly notable in Germany, with output hitting the lowest level in 9 months.

The housing market in the US slowed last month, with the number of new properties sold falling to the lowest level seen since last Autumn. The average sale price for a new home was 4% lower year-on-year. PMI data indicated that the manufacturing sector slipped back into recessionary territory this month, marking the first month of declining activity so far in 2024. The services PMI indicated that the sector continued to see relatively strong growth during July.

The release of June’s data for the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) index, showed that year-on-year PCE inflation was 2.6%. The data resulted in rising expectations for the Federal Reserve to cut interest rates in September, given Fed chair Jerome Powell’s recent comments. Powell has indicated that the central bank does not need to wait for inflation to fall below their target before cutting rates.

The Chinese government announced that it is earmarking 300 billion yuan ($41bn) to support businesses, local governments and households in upgrading old appliances, machinery and vehicles. The scheme will form a key part of stimulus efforts aimed at increasing consumer spending. The People’s Bank of China (PBOC) unexpectedly lowered one of their key interest rates last week in an effort to increase lending across the economy. US-China relations appeared to improve following a meeting between the US Secretary of State, Anthony Blinken, and China’s Foreign Minister, Wang Yi. Both parties reportedly emphasised the need for stability between the US and China.

A closely watched measure of inflation in Japan, the Tokyo Consumer Price Index (CPI) saw a year-on-year increase of 2.2% in July, which was slightly higher than the 2.1% recorded for June. An initial estimate for PMI data showed that the services sector expanded in July, whilst the manufacturing sector saw a slight contraction. The Yen reversed some of its recent weakness versus the US Dollar last week, which dented the profit outlook for Japanese exporters and weighed on Japanese equities.

The Gilt market reaction to speculation around government spending cuts was muted. It appears unlikely that Chancellor Rachel Reeves will announce any significant fiscal policy stimulus in the near future.

The week’s relatively soft PCE inflation data contributed to rising expectations for the Federal Reserve to cut interest rates in September. Neighbouring Bank of Canada (BoC) cut interest rates by 0.25% last week, with the central bank stating that easing inflationary pressures justify loosening monetary policy.

GBP / EUR – Current 1.1854 Previous 1.1868

The Pound moved slightly lower against other major currencies, falling by 0.36% against the US Dollar and 0.12% against the Euro.